Despite uncertainty about the global economy, potential impacts of minimum wage hikes and the outcome of the United States presidential election, the industrial real estate market in Long Beach and the South Bay area will remain tight for the rest of 2016, as demand continues to exceed supply, commercial real estate brokers told the Business Journal.
In recent years, as the economy has picked up from the recession, the primary challenge for industrial users mostly tied to the local ports has been finding available space as strong demand has kept vacancies at an all-time low, pushing up lease rates and sales prices, according to commercial real estate brokers, who added that the trend will continue this year.
“There’s a lack of product and there’s strong demand for industrial real estate that has outstripped our supply,” said Brandon Carrillo, principal and industrial real estate broker for Lee & Associates, who released a preliminary market report on first quarter statistics in April. “It’s been very challenging trying to locate product for the demand that we have right now, and a lot of businesses have been getting frustrated.”
For the first quarter of 2016, the direct vacancy rate for the Los Angeles/Long Beach industrial real estate market increased slightly to 1.1 percent from .9 percent in the fourth quarter of 2015, according to Lee & Associates, which notes that the vacancy rate this time last year was 2.8 percent, indicating a “dramatic tightness for space in the area.”
A recent market report by Xceligent for the Glendale-based American Industrial Real Estate Association (AIR), or Commercial Real Estate Association, the shows that vacancy rate in the first quarter of this year for the Long Beach, Paramount and Signal Hill industrial real estate submarket in South L.A. County was even lower at .8 percent.
Carrillo said the recent crash in the price of oil has somewhat trickled down to the local industrial real estate market as small suppliers and contractors in the oil industry are consolidating and putting real estate assets up for sublease and sale in order to ride out the downturn.
Still, available vacant space is filling up fast as other market sectors, such as the furniture industry, continue to grow due to a robust real estate climate and increased activity at the ports of Los Angeles and Long Beach, Carrillo said.
Lance Ryan, senior vice president of marketing and leasing for Carson-based Watson Land Company, which owns and manages more than 18 million square feet of industrial space in Southern California, said occupancy rates for submarkets in the entire L.A. basin are some of the highest on record, adding that the industrial real estate market will remain tight for all of 2016.
Watson Land Company has some activity on a few small spaces, but occupancy rates for most buildings averaging about 100,000 square feet, remain in the high 90 percent range, he said.
“For a lot of our size ranges, we just don’t have the space available that we normally would,” Ryan said. “We don’t have a lot of turnover as far as our tenant expirations this year also, so, when we look out for the remainder of the year, we just don’t see a lot of new supply coming online.”
Aside from some new projects underway at Douglas Park adjacent to the Long Beach Airport, there is still little space available for new development in the area, he said, adding that most projects involve “infill” development of small existing industrial buildings.
The lack of available new product will continue to put upward pressure on rental rates and downward pressure on concessions for industrial tenants, Ryan said.
He added that the downturn in the price of oil didn’t have much of an impact on the overall Southern California industrial real estate market since most oil is pipelined out of the area, though petroleum refineries and transportation companies may have been affected.
Companies, such as third party logistics firms, connected to international trade at the local ports, on the other hand, are the primary drivers of local industrial real estate, Ryan said, adding that imports through the San Pedro Bay ports were up the first quarter this year over 2015.
“We see a very steady import stream and increases over last year, so that’s really what drives the business here,” he said. “Our local market relies heavily on that. There are some exporters, but mostly [industrial real estate users are] relying on the imports and products that are going to the consumers.”
Ryan said lease rates are expected to continue rising this year, as the market remains tight. Determining factors to watch down the road are retail sales, employment and consumer confidence, he said.
Patrick O’Healy, president of O’Healy Commercial Real Estate Services who brokers and owns industrial real estate property in Signal Hill, said the local industrial real estate market continues to be “red hot” with record-low vacancy rates and sales prices remaining at an all-time high with properties receiving multiple offers. He said many industrial-related businesses with pent-up demand are now expanding as economic conditions have continued to improve.
“For a lot of years, we heard that the economy was recovering and I don’t think businesses really believed it,” O’Healy said. “I think that businesses that have had a lot of pent-up demand are probably convinced now that the economy is going to remain relatively robust.”
He said an undisclosed client, for example, plans to quadruple in size, moving from a 7,000 square-foot building in Signal Hill to a 28,000 square-foot building in Carson. Though the company had preferred to stay in Signal Hill, after searching for six months, it had no other choice but to relocate elsewhere because of the low inventory, O’Healy said.
Some businesses have been able to find space though. Elevator repair and maintenance company Liftech Elevator Services, Inc., which is also located in Signal Hill, plans to triple in size, for instance, and was able to find a larger facility across the street from its location, he said.
O’Healy noted that vacancy at the Signal Hill Business Park on East 28th Street between Temple Avenue and Junipero Avenue is at the lowest it has been in five years and all ground-floor industrial space has been fully occupied for the past three years.
He also predicts that lease rates will continue to rise over the next six months while sales prices for industrial real estate will accelerate even faster since Small Business Association (SBA) loans are still attractive while interest rates remain low.
A factor that has exacerbated the record-low vacancy of industrial product in Los Angeles County, however, is the fact that cities have been downzoning industrial properties and replacing them with multi-family residential and retail to generate more sales tax revenue, Carrillo said. Now, not enough industrial product is being put back on the market to fill demand, he said.
In addition, Carrillo said it’s uncertain how California’s recently approved legislation to raise the minimum wage to $15 an hour will play out in the market next year, adding that at least one industrial business in the area is considering whether to “pack up and relocate” out of the state or sell the company because of the higher minimum wage.
Other uncertainties for next year are whether United States voters will elect a Republican or Democratic president and if the economy experiences another downturn, he said.
Still, Carrillo said there are many bright spots ahead for the Los Angeles region with major new developments underway or in the works, including the National Football League’s plans to build a new stadium in 2019 in Inglewood to host the Rams and a new Porsche Experience Center expected to open mid-2016 in Carson. Both projects will benefit the industrial real estate market, he said.
Douglas Park Developments
Douglas Park in Long Beach, meanwhile, continues to be the only major site with new industrial real estate development in the South Bay area. The mixed-use business park has already attracted private aerospace company Virgin Galactic, which occupies a 150,000-square-foot building for its satellite launch vehicle program, as well as numerous manufacturers and headquarters operations.
Larry Lukanish, senior vice president for Irvine-based Sares-Regis Group (SRG), which continues to develop, sell and lease land formerly owned by Boeing, said construction is underway for three buildings with a combined total of 485,000 square feet of space for new corporate headquarters facilities. Building sizes range from more than 110,000 square feet to nearly 220,000 square feet each.
The development, which will include industrial space for manufacturing/distribution facilities and offices, will be located at Pacific Pointe East at the southeast corner of Lakewood Boulevard and Conant Street, across from Mercedes-Benz USA’s West Coast vehicle preparation center. Lukanish said the project, which is being built on speculation, is to be completed by the end of the year.
Future plans include a 77,000-square-foot building for corporate headquarters at Pacific Pointe Northwest, adjacent to Carson Street.
“There’s great demand for quality new construction of industrial space in the South Bay, including at Douglas Park in Long Beach,” he said. “When we deliver new buildings to the market, they’re very well received by tenants wanting to relocate from older stock product. They’re trying to expand and they can’t find space under one roof so these size buildings bode well for the tenants that we think are in the South Bay.”
Lukanish said SRG is also interested in Boeing’s former C-17 manufacturing plant that shuttered last year, however it’s still uncertain when the land will be available for possible development.